Last year, The New York Times ran a story about how teenagers were showing a surprising new reluctance to drive. That set us talking in my house. Both my husband and I recalled showing up at the DMV the day we became eligible for our respective permits. What was this about, we wondered. Were today’s kids so comfortable having their parents haul them around that they didn’t feel the need to drive themselves? Did they feel so connected to their friends via ichat that there was no need to be in the same room? Or was it out of concern for the environment?
The latter played a role, said to Gabe Zichermann, an expert in gamification (and therefore, millennials), and CEO of Dopamine, Inc. But it’s not the primary factor. Research he conducted for a leading automaker revealed that we’ve done such a good job convincing this generation that they can’t text and drive, that they don’t want to drive because they don’t want to not text. “Actually, it’s Instagram and Snapchat they can’t live without,” he said. There were hundreds of people in the room and you could have heard a pin drop. “Everything you thought you knew is up for negotiation,” he said.
That’s especially true when it comes to getting people to do the right things with their money. Zichermann dropped this bombshell last week at a client conference hosted by Fidelity Investments. I was there to moderate a panel, but was invited to listen to the rest of the proceedings as well. And I came away with a few glimpses of how the employers that provide our retirement plans are going to nudge us in the right direction financially – in particular, how they’re going to get us to save more money. This week, I thought I’d share.
Automate their savings
Get ready to see higher automatic default rates in 401(k) plans (and “form designer” on the list of the hottest careers.) According to Dan Ariely, the author of Predictably Irrational who spoke at the conference, goals don’t drive behavior. The small details of life do. Like? Whether or not you have enough time in your busy day to check a box on a form you’re already filling out. Ariely showed a graph of the percentage of organ donors a variety of European countries, then asked why they were so strikingly different in Denmark (4.25%) and Sweden (86%), for example, where the cultures are so similar.
It wasn’t religion, or culture but the fact that in Denmark people had to opt in (i.e. check a box) to donate; in Sweden they had to opt out (i.e. do nothing) to participate. Forcing employees to opt out of the retirement plan at work rather than giving them the choice to opt in has been similarly successful at many American companies. What hasn’t worked is that the default contribution rates were set – by and large – at 3%. Even with matching dollars, that’s not going to get you to retirement. Now companies are starting to increase those levels to see if employees push back. At Credit Suisse (CS), for example, the auto default was raised to 9%. The effort was considered a big success with no negative reaction from employees. Noted Credit Suisse’s Joseph Huber: “Education is very important, but Auto features produce real results !”
Remind them how much they can lose
Taking away matching dollars might be more effective than giving them. Loss aversion is an important tenet of behavioral finance. Essentially, it’s the fact that human beings hate losing money about twice as much as we enjoy gaining an equal amount. It makes us bad investors because we hesitate to sell the losers in our portfolios. Why? It hurts too much. Now plan sponsors are toying with the idea of using loss aversion to increase 401(k) participation.
The idea is that they’ll put the maximum match into your account – you’ll actually receive the money. Then, if you don’t contribute enough to qualify for that match, they’ll take it away. The hope is that loss aversion will kick in and employees will ante up. Says Ariely: “It’s working very well in the lab.”
Send savings alerts
Everyone’s a little bit narcissistic (and that’s not necessarily a bad thing). Each year, the benefits department at Microsoft (MSFT) conducts a saving campaign to try to get its fairly young, fairly affluent workforce to not just contribute to the retirement plan, but contribute enough to get the match. This year, instead of general slogans to the entire population, it targeted the approach to each employee.
You’d receive notice that noted how much you were missing out on by not ramping up your individual efforts. Something like, “Did you know you were missing out on $182 per paycheck by not contributing to the retirement plan?” Participation rates, which had been stuck at 87% according to Sonja Kellan, director of Global Retirement Benefits at Microsoft, jumped past 90%.
Talk about money – as a couple
Talking about money is more important than ever, although, as you might recall, it isn’t easy. Another of Ariely’s lab findings is that when couples discuss how much he – or she – is contributing to the retirement plan, the contribution amount rises. Why? “When people think together as a couple, they make better decisions about their long term future.”
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